| Thu 9 Nov 2006, 8:55 | | Sappi Limited - Results for the quarter ended Sept |
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SAP
SAVVI
Sappi Limited - Results for the quarter ended September 2006
SAPPI LIMITED
(Registration number 1936/008963/06)
Issuer Code: SAVVI
JSE Code: SAP
ISIN Code: ZAE000006284
Results for the quarter ended September 2006
Highlights for the Quarter
* EPS 18 US cents; headline EPS 2 US cents
* North America reports operating profit
* European headcount reduction - 650 positions
* Rand weakness benefits SA businesses
* Usutu Mill turnaround
* Improved cash flow
Summary
Quarter ended
Sept June Sept
2006 2006 2005**
Sales (US$ million) 1,296 1,214 1,388
Operating profit (loss) (US$ million) 51 (34) 12
Operating profit (loss) to sales (%) 3.9 (2.8) 0.9
EBITDA (US$ million) * 170 82 135
EBITDA to sales (%) * 13.1 6.8 9.7
Operating profit (loss) to average net
assets (%) * 5.2 (3.4) 1.2
Headline EPS (US cents) * 2 (20) (5)
EPS (US cents) 18 (23) (13)
Return on average equity (ROE) (%) * 11.7 (14.6) (7.2)
Net debt (US$ million) * 2,113 2,222 2,008
Net debt to total capitalisation (%) * 46.4 47.4 40.9
Year ended
Sept Sept
2006 2005**
Sales (US$ million) 4,941 5,018
Operating profit (loss) (US$ million) 125 (109)
Operating profit (loss) to sales (%) 2.5 (2.2)
EBITDA (US$ million) * 591 381
EBITDA to sales (%) * 12.0 7.6
Operating profit (loss) to average net assets (%) * 3.1 (2.5)
Headline EPS (US cents) * (11) 20
EPS (US cents) (2) (81)
Return on average equity (ROE) (%) * (0.3) (10.4)
Net debt (US$ million) * 2,113 2,008
Net debt to total capitalisation (%) * 46.4 40.9
* Refer to Supplemental Information for the definition of the term and
reconciliation of profit (loss) for the period to EBITDA.
** Comparative amounts have been restated to take into account the effect of the
adoption of International Financial Reporting Standards (Refer to note 2)
Note: 2006 fiscal year included 52 weeks (2005 fiscal year: 53 weeks),
September 2006 quarter included 13 weeks (September 2005 quarter:
14 weeks)
Comment
Our financial results improved considerably this quarter driven primarily by
better operating performance and lower costs, aided by currency movements. The
results were impacted by a number of largely offsetting abnormal items which
are more fully discussed below.
Global demand was positive but in Europe coated fine paper apparent consumption
fell slightly in relation to a strong quarter a year ago. Coated fine paper
prices in Europe were lower in comparison to both the prior quarter and last
year. Modest price increases were achieved in North America during the quarter.
Pulp demand and prices continued to improve.
Group sales were US$1.296 billion, an increase of 7% in comparison to the prior
quarter due to improved sales volumes. The 7% reduction in group sales in
comparison to the same quarter last year was mainly due to the inclusion of an
additional week in the accounting period last year.
Over the past 2 years, the price impact of higher raw materials and energy
costs has reduced our operating earnings in aggregate by more than US$250
million. In this fiscal quarter the negative effect was approximately US$30
million compared to the same quarter last year, bringing the total price impact
for the year to more than US$130 million compared to the prior year. We have
recently seen some easing of certain input costs and compared to the June
quarter there was a modest favourable impact.
The operating profit of US$51 million was negatively impacted by a net pre-tax
amount of US$24 million comprising a restructuring charge of US$40 million in
Europe in respect of the planned reduction of the workforce by approximately
650 (12%), a US$15 million negative plantation fair value charge (net of
fellings) and US$9 million of miscellaneous impairments of replaced assets
partly offset by a US$40 million impairment reversal at Usutu Mill.
The South African businesses benefited from the weaker Rand. The average rate
for the quarter of R7.25 per US Dollar was 10% weaker than a year earlier.
Finance costs for the quarter were US$37 million, US$11 million higher than the
same quarter last year, mainly due to higher interest paid and changes in the
fair value of financial instruments. There was an unfavourable change in the
fair value of financial instruments of US$4 million compared to a favourable
change of US$5 million in the equivalent quarter last year.
Tax was favourable this quarter due to tax credits from loss making entities
and the release of allowances for prior years" assessments more than offsetting
taxable earnings.
Earnings per share for the quarter were 18 US cents compared to a loss of 13 US
cents per share last year. Headline earnings per share, which exclude the
impairment reversal and asset write-offs but include the plantation revaluation
and European restructuring charges, were 2 US cents compared to a 5 US cent
loss a year ago.
For the full fiscal year, the loss per share was 2 US cents per share compared
to a loss of 81 US cents per share in the prior year. The headline loss per
share was 11 US cents for the year compared to earnings of 20 US cents in the
prior year.
Cash flow and debt
Cash generated by operations was US$158 million for the quarter, 98% of the
equivalent quarter last year; in addition we generated US$80 million from a
reduction in working capital. After investing activities we generated US$106
million of cash, 103% of the equivalent quarter last year. For the full year,
we utilised US$127 million of cash after investing activities.
Finance cost payments were US$22 million compared to US$48 million last quarter
which included a semi-annual payment on the US$750 million bonds.
Capital expenditure was US$90 million, well down on last year despite the start
of the Saiccor expansion project. We have continued to strictly prioritise
capital expenditure to allow us to proceed with the Saiccor expansion without a
marked increase in total capital expenditure compared to previous years.
Net debt was US$2.1 billion at quarter end, down US$109 million
on the previous quarter of which US$31 million was a result of currency
translation. Net debt to total capitalisation reduced to 46.4% from 47.4% last
quarter.
Operating Review for the Quarter
Sappi Fine Paper
Quarter ended
Sept 2006 Sept 2005 % June 2006
US$ million US$ million change US$ million
Sales 1,029 1,119 (8.0) 968
Operating loss (40) (21) - (18)
Operating loss to
sales (%) (3.9) (1.9) - (1.9)
EBITDA 43 66 (34.8) 62
EBITDA to sales (%) 4.2 5.9 - 6.4
RONOA pa (%) (5.1) (2.7) - (2.3)
The North American and South African businesses generated small operating
profits in the quarter. The European business incurred restructuring and
impairment charges of US$48 million resulting in an operating loss of US$48
million for the quarter.
Europe
Quarter ended
Sept 2006 Sept 2005 % change % change June 2006
US$ million US$ million (US$) (Euro) US$ million
Sales 569 596 (4.5) (9.1) 536
Operating (loss) profit (48) 42 - - 1
Operating profit
(loss) to sales (%) (8.4) 7.0 - - 0.2
EBITDA 1 94 (98.9) (99.0) 47
EBITDA to sales (%) 0.2 15.8 - - 8.8
RONOA pa (%) (10.4) 9.6 - - 0.2
Our sales volumes (adjusted for the number of weeks) were similar to the same
quarter last year. Average prices realised were lower than a year ago in Euro
terms due to geographic mix and slightly lower product prices. Reversing this
price trend remains our priority.
The intensive cost reduction programme throughout our operations is continuing.
We have announced plans to reduce headcount by approximately 650,representing
12% of the workforce.
We are starting to see encouraging developments in a number of input costs but
in comparison to the same quarter last year, wood and energy unit costs
continued to increase. In comparison to the prior quarter energy and chemical
costs both decreased.
Although the group is a net seller of pulp, our European business is a large
pulp purchaser. Purchased pulp costs increased approximately US$8 million in
comparison to the same quarter last year.
During the quarter we completed the rebuild of the Ehingen mill paper machine
to enhance quality and reduce production costs.
North America
Quarter ended
Sept 2006 Sept 2005 % June 2006
US$ million US$ million change US$ million
Sales 373 424 (12.0) 354
Operating profit
(loss) 7 (48) - (14)
Operating profit
(loss) to sales (%) 1.9 (11.3) - (4.0)
EBITDA 37 (16) - 16
EBITDA to sales (%) 9.9 (3.8) - 4.5
RONOA pa (%) 2.5 (15.4) - (4.9)
Key factors in the return of the North American business to operating
profitability were seasonally strong demand, improved operating efficiency,
some improvement in prices and strong pulp sales.
We concluded labour agreements at Somerset and Westbrook mills during the
quarter. At Cloquet and Muskegon mills final offers have been made and
discussions with the union continue.
Wood, energy and chemical prices remained high compared to 2005 and had a
negative impact of US$13 million this quarter compared to the same quarter last
year. In comparison to the prior quarter input cost prices, particularly wood
prices, declined. Our wood costs have benefited from the closure of pulp mills
and other processing plants in the vicinity of our mills.
Fine Paper South Africa
Quarter ended
Sept 2006 Sept 2005 % change
US$ million US$ million (US$)
Sales 87 99 (12.1)
Operating profit (loss) 1 (15) -
Operating profit
(loss) to sales (%) 1.1 (15.2) -
EBITDA 5 (12) -
EBITDA to sales (%) 5.7 (12.1) -
RONOA pa (%) 2.6 (36.1) -
% change June 2006
(Rand) US$ million
Sales (2.4) 78
Operating profit (loss) - (5)
Operating profit
(loss) to sales (%) - (6.4)
EBITDA - (1)
EBITDA to sales (%) - (1.3)
RONOA pa (%) - (11.9)
Fine Paper South Africa received some benefit from the weaker Rand relative to
the US Dollar and Euro during the quarter as a result of reduced import
competition and an improvement in margins.
Demand in the domestic market was firm in the quarter. Average prices realised
in Rands were approximately 9% higher than a year ago.
The results were unfavourably impacted by higher prices of purchased pulp.
Forest Products
Quarter ended
Sept 2006 Sept 2005 % change
US$ million US$ million (US$)
Sales 267 269 (0.7)
Operating profit (loss) 85 35 142.9
Operating profit (loss) to sales (%) 31.8 13.0 -
EBITDA 121 70 72.9
EBITDA to sales (%) 45.3 26.0 -
RONOA pa (%) 27.9 10.8 -
Plantation fair value net of
fellings - gain (loss) (15) 27 -
% change June 2006
(Rand) US$ million
Sales 10.2 246
Operating profit (loss) 169.9 (16)
Operating profit (loss) to sales (%) - (6.5)
EBITDA 91.9 20
EBITDA to sales (%) - 8.1
RONOA pa (%) - (4.7)
Plantation fair value net of
fellings - gain (loss) - (22)
Demand in the South African market was strong for containerboard and newsprint
in the quarter. International pulp markets continued to be buoyant with good
demand and rising prices for our chemical cellulose and paper grade pulp.
The expansion project at Saiccor mill commenced in the quarter.
This business is sensitive to currency movements. With a high proportion of
costs incurred in local currency and most of the sales directly or indirectly
US Dollar-linked, a weaker Rand benefits the business all else being equal.
In the first quarter of fiscal 2005 we recorded an impairment charge of US$41
million in respect of the Usutu pulp mill, which had incurred losses for some
time. Since then, operational and quality improvements at the mill, pulp price
increases and the weakening of the Rand against the US Dollar have
significantly improved the mill"s profitability. We therefore recorded an
impairment reversal this quarter of US$40 million. We expect to invest
approximately US$15 million over the next 18 months to improve performance
further.
Operating profit was impacted by the plantation net fair value adjustment of
US$15million which was negative again this quarter but more than offset by the
Usutu impairment reversal.
Dividend
The board has declared a dividend of 30 US cents for the year ended September
2006. A dividend of 30 US cents was paid in the previous year.
Directors
Donald Gert Wilson resigned as Executive Director Finance during the quarter
and Mark Richard Thompson was appointed in his place. John Leonard Job resigned
as a non- executive director of the group in September 2006.
Outlook
We have seen continued improvement in the supply/demand balance for coated fine
paper. After the exuberant expansion of capacity in Europe at the start of this
decade and more recently in Asia, there are no known major coated fine paper
machines due to start up before late 2009. Significant capacity has been closed
in both Europe and North America during the past year.
There has been a reversal in the trend of some key raw material input prices.
Wood prices in Europe have, however, increased as a result of demand for
"green" fuel.
At current Rand exchange rates our South African businesses are able to achieve
reasonable margins and we will continue to improve the efficiency of the mills,
which have not achieved our performance targets.
We expect further improvement in our operating performance in the December
quarter and that earnings before any plantation fair value adjustments will be
positive.
On behalf of the Board
E van As MR Thompson
Director Director 9 November 2006
Dividend Announcement
The directors have declared a dividend (number 83) of 30 US cents per share for
the year ended September 2006.
In compliance with the requirements of STRATE, the JSE electronic settlement
system which is applicable to Sappi, the salient dates in respect of the
dividend will be as follows:
Last day to trade to qualify for dividend Thursday 28 December 2006
Date on which shares commence
trading ex-dividend Friday 29 December 2006
Record date Friday 5 January 2007
Payment date Monday 8 January 2007
Dividends payable from the Johannesburg transfer office will be paid in South
African Rands except that dividends payable to nominee shareholders in respect
of shares which they hold on behalf of non-residents of the Republic of South
Africa will without exception be paid in United States Dollars. There will not
be any election.
Dividends payable from the London transfer office will be paid in British
Pounds Sterling or in the case of shareholders with registered addresses in the
USA, in United States Dollars.
Dividends payable other than in United States Dollars will be calculated at the
respective rates of exchange ruling at 21h15 Central European Time as per
Reuters on Monday 18 December 2006, and announced on Tuesday, 19 December 2006.
There will not be any de-materialisation nor re-materialisation of Sappi
Limited share certificates from Friday 29 December 2006 to Friday 5 January
2007, both days inclusive.
Sappi Management Services (Pty) Limited
Secretaries
Per D J O"Connor
9 November 2006
Forward-looking statements
Certain statements in this release that are neither reported financial results
nor other historical information, are forward-looking statements, including but
not limited to statements that are predictions of or indicate future earnings,
savings, synergies, events, trends, plans or objectives.
Undue reliance should not be placed on such statements because, by their
nature, they are subject to known and unknown risks and uncertainties and can
be affected by other factors, that could cause actual results and company plans
and objectives to differ materially from those expressed or implied in the
forward-looking statements (or from past results). Such risks, uncertainties
and factors include, but are not limited to the highly cyclical nature of the
pulp and paper industry (and the factors that contribute to such cyclicality,
such as levels of demand, production capacity, production, input costs
including raw material, energy and employee costs, and pricing), adverse
changes in the markets for the group"s products, consequences of substantial
leverage, changing regulatory requirements, unanticipated production
disruptions, economic and political conditions in international markets, the
impact of investments, acquisitions and dispositions (including related
financing), any delays, unexpected costs or other problems experienced with
integrating acquisitions and achieving expected savings and synergies and
currency fluctuations. The company undertakes no obligation to publicly update
or revise any of these forward-looking statements, whether to reflect new
information or future events or circumstances or otherwise.
Group income statement
Restated
Reviewed Reviewed
Quarter Quarter
ended ended
Sept 2006 Sept 2005
US$ million US$ million % change
Sales 1,296 1,388 (6.6)
Cost of sales 1,137 1,244
Gross profit 159 144 10.4
Selling, general & administrative
expenses 99 102
60 42
Other expenses 9 30
Operating profit (loss) 51 12 (325.0)
Net finance costs 37 26
Net paid 36 30
Capitalised (1) -
Net foreign exchange (gains) losses (2) 1
Change in fair value of financial
instruments 4 (5)
Profit (loss) before tax 14 (14) -
Taxation - current (11) 22
- deferred (15) (7)
Profit (loss) for the period 40 (29) -
Profit (loss) per share (US cents) 18 (13)
Weighted average number of shares
in issue (millions) 226.5 225.8
Diluted profit (loss) per share
(US cents) 17 (13)
Weighted average number of shares
on fully diluted basis (millions) 228.6 226.6
Restated
Reviewed Reviewed
Year Year
ended ended
Sept 2006 Sept 2005
US$ million US$ million % change
Sales 4,941 5,018 (1.5)
Cost of sales 4,420 4,507
Gross profit 521 511 2.0
Selling, general & administrative
expenses 366 361
155 150
Other expenses 30 259
Operating profit (loss) 125 (109) -
Net finance costs 130 80
Net paid 136 125
Capitalised (2) (1)
Net foreign exchange (gains) losses (7) (5)
Change in fair value of financial
instruments 3 (39)
Profit (loss) before tax (5) (189) -
Taxation - current 5 45
- deferred (6) (50)
Profit (loss) for the period (4) (184) -
Profit (loss) per share (US cents) (2) (81)
Weighted average number of shares
in issue (millions) 226.2 225.8
Diluted profit (loss) per share
(US cents) (2) (81)
Weighted average number of shares
on fully diluted basis (millions) 228.0 226.7
Note: Refer to notes to the group results for Headline earnings and calculation
thereof.
Group balance sheet
Restated
Reviewed Reviewed
Sept 2006 Sept 2005
US$ million US$ million
ASSETS
Non-current assets 3,997 4,244
Property, plant and equipment 3,129 3,333
Plantations 520 604
Deferred taxation 74 70
Other non-current assets 274 237
Current assets 1,500 1,645
Inventories 699 711
Trade and other receivables 577 567
Cash and cash equivalents 224 367
Assets held for sale 20 -
Total assets 5,517 5,889
EQUITY AND LIABILITIES
Shareholders" equity
Ordinary shareholders" interest 1,386 1,589
Non-current liabilities 2,465 2,547
Interest-bearing borrowings 1,634 1,600
Deferred taxation 336 367
Other non-current liabilities 495 580
Current liabilities 1,666 1,753
Interest-bearing borrowings 694 616
Bank overdraft 9 159
Other current liabilities 862 858
Taxation payable 101 120
Total equity and liabilities 5,517 5,889
Number of shares in issue at balance sheet date
(millions) 227.0 225.9
Group cash flow statement
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Year Year
ended ended ended ended
Sept 2006 Sept 2005 Sept 2006 Sept 2005
US$ million US$ million US$ million US$ million
Operating
profit (loss) 51 12 125 (109)
Depreciation,
fellings and
other
amortisation 119 123 466 490
Other non-cash
items
(including
impairment
charges) (12) 27 (127) 188
Cash generated
by operations 158 162 464 569
Movement in
working capital 80 80 (17) (30)
Net finance
costs (22) (27) (138) (127)
Taxation paid (1) (3) (13) (43)
Dividends paid - - (68) (68)
Cash retained
from operating
activities 215 212 228 301
Cash effects of
investing
activities (109) (109) (355) (379)
Cash generated
(utilised)
before
financing
activities 106 103 (127) (78)
Cash effects of
financing
activities (55) 92 (21) (37)
Net movement in
cash and cash
equivalents 51 195 (148) (115)
Group statement of recognised income and expense
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Year Year
ended ended ended ended
Sept 2006 Sept 2005 Sept 2006 Sept 2005
US$ million US$ million US$ million US$ million
Pension fund
asset not
recognised (37) (6) (43) (6)
Actuarial gains
(losses) on
pension and
other post
employment
benefit
liabilities 105 (56) 100 (56)
Deferred
taxation on
above items (20) 11 (19) 11
Valuation
allowance
against
deferred tax
asset on
actuarial
losses
recognised 9 - 9 (62)
Exchange
differences on
translation of
foreign
operations (67) 46 (189) 8
Net expense
recorded
directly in
equity (10) (5) (142) (105)
Profit (loss) for
the period 40 (29) (4) (184)
Recognised
income (expense)
for the period 30 (34) (146) (289)
Notes to the group results
1. Basis of preparation
The condensed quarterly financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS). Sappi is reporting
under IFRS for the first time for the year ending September 2006. The date of
first transition to IFRS is October 2004 and comparative results have been
restated accordingly. The condensed consolidated interim financial statements
do not include all of the information required for full annual financial
statements.
These quarterly results have been prepared in accordance with IAS 34 (Interim
financial reporting). The accounting policies used in the preparation of the
quarterly results are compliant with IFRS and consistent with those used in the
annual financial statements for September 2005, except as disclosed below.
The preliminary results for the quarter have been reviewed in terms of
International Standards on Review Engagements by the group"s auditors, Deloitte
& Touche. Their unqualified review report includes an emphasis of matter that
amendments to the interpretive guidance issued between the date of this
announcement and the finalisation of the financial statements for the year
ending September 2006, may result in changes to the restatements published.
This report is available for inspection at the company"s registered offices.
2. Effect of the first time adoption of IFRS
As discussed in Note 1, the group has adopted International Financial Reporting
Standards (IFRS) in preparing its consolidated financial statements for the
year ending September, 2006. For purposes of these interim financial
statements, the group has developed accounting policies based on IFRS issued to
date that will be effective at our reporting date of September, 2006. IFRS 1,
First-time Adoption of International Financial Reporting Standards, requires
that an entity develop accounting policies based on the standards and related
interpretations effective at the reporting date of its first IFRS financial
statements. IFRS 1 also requires that those policies be applied as of the date
of transition to IFRS and throughout all periods presented in the first IFRS
financial statements. The accounting policies used in these financial
statements are subject to change up to the reporting date of our first IFRS
financial statements. Management does not believe the final accounting policies
will change materially from those utilised in the preparation of the
accompanying interim financial statements.
The following exemptions in accordance with IFRS 1 were considered:
Business Combinations - IFRS 3
The group has elected not to retrospectively apply the requirements of IFRS 3
for Business Combinations that occurred prior to October 2004.
Share-based Payment - IFRS 2
The group has applied the share-based payment exemption therefore IFRS 2 is
only applicable to equity instruments granted after 7 November 2002 that were
not vested by 1 January 2005. Liabilities arising from cash-settled share-based
payment settled after 1 January 2005 are subject to IFRS 2. For instruments
vesting on or after 1 January 2005, Sappi has recognised a charge in the income
statement and set up a separate category in shareholders" equity for all share
options and awards, based on the fair value of the awards as calculated at the
grant date.
The Effects of Changes in Foreign Exchange Rates - IAS 21
Sappi has elected to apply the exemption in IFRS 1 which allows the cumulative
translation differences of all foreign operations to be reset to zero by
transfer to distributable reserve at the date of transition to IFRS which is
October 2004.
Adjustments on adoption of IFRS
The adoption of IFRS led to changes in the Group"s financial position,
financial performance and cash flows. The significant differences between
previously reported SA GAAP financial statements and IFRS are as follows:
Share-based Payment - IFRS 2
Sappi has recognised a charge in the income statement and established a
separate category in shareholders" equity for all share options and awards,
based on the fair value of the awards as calculated at the grant date. The cost
of the share options and grants are reflected in the income statement over the
vesting period. This IFRS change had no impact on the comparative total
shareholders" equity as a Share Based Payment Reserve is created with the equal
and opposite amount included in retained earnings.
Employee Benefits - IAS 19
Previously unrecognised actuarial employee benefit losses were recognised at
October 2004, resulting in an increase in pension and other post employment
benefits liabilities and a corresponding reduction in equity and deferred tax
liability. These adjustments also led to a reduction in employee benefit
expense in profit for the period. Sappi has elected to adopt the policy of
recognising actuarial gains and losses in the period in which they occur. The
gains and losses are recognised outside of profit for the period in the
statement of recognised income and expense (SORIE). Items processed through
SORIE are tax effected through SORIE. Part of the first time adoption of this
method of accounting included a historic analysis of all pension fund movements
to determine the portion of our deferred tax balances that relate to SORIE.
Financial Instruments - IAS 39
A significant portion of our securitised receivables is now reflected on our
balance sheet, increasing trade and other receivables by US$268 million and
short term debt by US$346 million and decreasing other payables by US$78
million at September 2005. The related expense is no longer reflected in S,G&A
but is included under finance costs. This caused an increase in finance costs
and decrease in S,G&A of US$15 million for the year ended September 2005.
Cash flow hedges on inter-company loans, accounted for in equity, no longer
qualify for hedge accounting under IAS 39. As a result these instruments are
now recognised at fair value through profit and loss.
The Effects of Changes in Foreign Exchange Rates - IAS 21
Sappi has elected to apply the exemption in IFRS 1 which allows the cumulative
translation differences of all foreign operations to be reduced to zero at the
date of transition to IFRS which is October 2004. The Foreign Currency
Translation Reserve (Non Distributable Reserve) was transferred to retained
earnings. This IFRS change has no impact on total shareholders" equity.
There are no other accounting policy changes relevant to the first time
adoption of IFRS.
Property, Plant and Equipment - IAS 16
Changes to IAS 16 Property, Plant and Equipment include the requirement that
the useful lives of fixed assets are re-evaluated on an annual basis, changed
capitalisation criteria and more explicit guidance on the capitalisation of
fixed assets. These changes have led to the revision of the relevant accounting
policies. In addition a detailed review of the group"s assets including a
benchmarking exercise against peer-group companies was completed. Management
concluded that no adjustment to the carrying value of property, plant and
equipment was necessary with the first-time adoption of IFRS.
Reconciliation of previous SA GAAP to IFRS for shareholders" equity
Reviewed Reviewed
Year IFRS
ended transition
Sept 2005 Oct 2004
US$ million US$ million
Total equity presented under SA GAAP 1,881 2,157
Impact on retained earnings:
Recognition of previously unrecognised
actuarial losses - IAS 19 (339) (300)
Deferred taxation impact of IAS 19 change 43 93
Share-based Payment - IFRS 2 (20) (9)
Release of cash flow hedge reserve - IAS 39 14 (2)
Foreign Currency Translation Reserve reset to
zero at October 2004 244 244
Share Based Payment Reserve - IFRS 2 20 9
Hedging Reserves - IAS 39 (14) 2
Foreign Currency Translation Reserve (240) (244)
Total equity and reserves presented under IFRS 1,589 1,950
Reconciliation of previous SA GAAP to IFRS loss for the year
Reviewed
Year
ended
Sept 2005
US$ million
Loss under SA GAAP (213)
Reduction in expense due to recognition of
actuarial gains and losses - IAS 19 23
Deferred taxation impact of IAS 19 1
Share-based payment expense - IFRS 2 (10)
Gains from cash flow hedges that do not qualify
for hedge accounting - IAS 39 22
Deferred taxation impact of IAS 39 (7)
Loss under IFRS (184)
IFRS cash flow statement impact
The reduction in employee benefit expense resulted in an increase in operating
profit and a corresponding decrease in non-cash items. Share-based payment
costs led to a decrease in operating profit and an increase in non- cash items.
The recognition of securitised debtors caused the related costs to be reflected
under finance costs instead of included in operating profit. In addition
related movements are reflected in working capital and borrowings.
IFRS impact on net debt
In accordance with IAS 39 a significant portion of our securitised receivables
are now reflected on our balance sheet, increasing trade and other receivables
by US$268 million and short term debt by US$346 million and decreasing other
payables by US$78 million at September 2005. This resulted in an increase in
net debt of US$346 million from US$1,662 million to US$2,008 million at
September 2005.
IFRS impact on contingent liabilities
In accordance with IAS 39 securitised receivables are now reflected on our
balance sheet. The contingent liabilities disclosed at September 2005 included
certain guarantees related to the securitisation programme. The amount
disclosed for September 2005 has been amended accordingly to exclude these
guarantees as the liablity is now disclosed on balance sheet.
Circular 9/2006 - Transactions giving rise to adjustments to sales/purchases
The South African Institute of Chartered Accountants issued a circular on
the treatment of settlement discount in accordance with IFRS.
This circular clarifies the following IFRS interpretations:
Settlement/cash discounts allowed should be estimated at the time of sale
and presented as a reduction in sales.
Settlement/cash discount received should be deducted from the cost of
inventories, or cost of sales.
Management has evaluated the impact of the above interpretations on the group"s
results and the impact was found to be minimal. The results have been adjusted
accordingly for this circular.
3. Reconciliation of movement in shareholders"
equity Restated
Reviewed Reviewed
Year Year
ended ended
Sept 2006 Sept 2005
US$ million US$ million
Balance - beginning of year as reported 1,881 2,157
IFRS adoption (refer note 2) (292) (207)
Recognition of previously unrecognised
actuarial losses - IAS 19 (339) (300)
Deferred taxation impact of IAS 19 change 43 93
Foreign currency effect 4 -
Balance - beginning of year restated 1,589 1,950
Total recognised expense for the period (146) (289)
Dividends paid (68) (68)
Share buybacks net of transfers to participants
of the share purchase trust 5 (14)
Share Based Payment Reserve 6 11
Balance - end of year 1,386 1,590
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Year Year
ended ended ended ended
Sept 2006 Sept 2005 Sept 2006 Sept 2005
US$ million US$ million US$ million US$ million
4. Operating
profit
Included in
operating
profit are the
following
non-cash items:
Depreciation and
amortisation
Depreciation of
property, plant
and equipment 99 105 390 422
Other
amortisation 1 1 2 2
100 106 392 424
Impairment of
property, plant
& equipment 1 14 9 233
Impairment of
other assets - - - 3
Impairment
reversal of
property, plant
& equipment (40) (4) (40) (4)
61 116 361 656
Fair value
adjustment
on plantations
(included in
cost of sales)
Changes in
volume
Fellings 19 17 74 66
Growth (14) (9) (70) (58)
5 8 4 8
Changes in fair
value 10 (35) (34) (60)
15 (27) (30) (52)
5. Headline
earnings per
share
Headline
earnings per
share (US
cents) * 2 (5) (11) 20
Weighted
average number
of shares in
issue
(millions) 226.5 225.8 226.2 225.8
Diluted
headline
earnings per
share (US
cents) * 2 (5) (11) 20
Weighted
average number
of shares on
fully 228.6 226.6 228.0 226.7
diluted basis
(millions)
Calculation of
Headline
earnings *
Profit
(loss) for
the period 40 (29) (4) (184)
Loss (profit)
on disposal of
business and
property, plant
& equipment - 1 (2) 2
Write-off of
assets 4 2 11 6
Impairment of
property, plant
& equipment 1 12 9 219
Reversal of
impairment of
property, plant
& equipment (40) - (40) -
Debt
restructuring
costs - 2 - 2
Headline
earnings 5 (12) (26) 45
* Headline
earnings
disclosure is
required by the
JSE Limited.
6. Capital
expenditure
Property, plant
and equipment 90 124 303 345
Reviewed Reviewed
Sept 2006 Sept 2005
US$ million US$ million
7. Capital commitments
Contracted but not provided 294 115
Approved but not contracted 255 198
549 313
8. Contingent liabilities
Guarantees and suretyships 52 52 *
Other contingent liabilities 11 11
* In accordance with IAS 39 securitised receivables are now reflected on our
balance sheet. The contingent liabilities disclosed at September 2005
included certain guarantees related to the securitisation programme. The
amount disclosed for September 2005 has been amended accordingly to exclude
these guarantees as the liablity is now disclosed on balance sheet.
9. Assets held for sale
The land and buildings occupied by Nash Mill have been classified as
"assets held for sale" in the current quarter.
Supplemental information
Definitions
Average - averages are calculated as the sum of the opening and closing
balances for the relevant period divided by two
* EBITDA - earnings before interest (net finance costs), tax, depreciation and
amortisation
* EBITDA to sales - EBITDA divided by sales
Fellings - the amount charged against the income statement representing the
standing value of the plantations harvested
Headline earnings - as defined in Circular 7/2002 issued by the South African
Institute of Chartered Accountants, separates from earnings all items of a
capital nature. It is not necessarily a measure of sustainable earnings. It is
a listing requirement of the JSE Limited to disclose headline earnings per
share
NBSK - Northern Bleached Softwood Kraft pulp. One of the main varieties of
market pulp, mainly produced from spruce trees in Scandinavia, Canada and north
eastern USA. The NBSK is a benchmark widely used in pulp and paper industry for
comparative purposes
* Net assets - total assets less current liabilities
* Net asset value - shareholders" equity plus net deferred tax
* Net asset value per share - net asset value divided by the number of shares
in issue at balance sheet date
* Net debt - current and non-current interest-bearing borrowings, and bank
overdrafts (net of cash, cash equivalents and short-term deposits)
* Net debt to total capitalisation - Net debt divided by shareholders" equity
plus minority interest, non-current liabilities, current interest-bearing
borrowings and overdraft
* ROE - return on average equity. Profit (loss) for the period divided by
average shareholders" equity
* RONA - operating profit divided by average net assets
* RONOA - operating profit divided by average net operating assets. Net
operating assets are total assets (excluding deferred taxation and cash)
less current liabilities (excluding interest-bearing borrowings and bank
overdraft)
* SG&A - selling, general and administrative expenses
* The above financial measures, other than headline earnings per share, are
presented to assist our shareholders and the investment community in
interpreting our financial results. These financial measures are regularly
used and compared between companies in our industry.
Supplemental information
Additional information
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Year Year
ended ended ended ended
Sept 2006 Sept 2005 Sept 2006 Sept 2005
US$ million US$ million US$ million US$ million
Profit (loss)
for the period
to EBITDA (1)
reconciliation
Profit
(loss) for the period 40 (29) (4) (184)
Net finance
costs 37 26 130 80
Taxation
- current (11) 22 5 45
- deferred (15) (7) (6) (50)
Depreciation 99 105 390 422
Amortisation
(including
fellings) 20 18 76 68
EBITDA (1) 170 135 591 381
Restated
Reviewed Reviewed
Sept 2006 Sept 2005
US$ million US$ million
Net debt (US$ million) (2) 2,113 2,008
Net debt to total capitalisation (%) (2) 46.4 40.9
Net asset value per share (US$) (2) 7.26 8.35
(1) In connection with the U.S. Securities Exchange Commission ("SEC") rules
relating to "Conditions for Use of Non-GAAP Financial Measures", we have
reconciled EBITDA to net profit rather than operating profit and
recalculated EBITDA. As a result our definition has been amended to retain
non-trading profit/loss and minority interest as part of EBITDA. EBITDA
represents earnings before interest (net finance costs), taxation,
depreciation and amortisation (including fellings). Net finance costs
includes: gross interest paid; interest received; interest capitalised;
net foreign exchange gains; and net fair value adjustments on interest
rate financial instruments. See the Group income statement for an
explanation of the computation of net finance costs. We use EBITDA as an
internal measure of performance to benchmark and compare performance, both
between our own operations and as against other companies. EBITDA is a
measure used by the group, together with measures of performance under
IFRS and US GAAP, to compare the relative performance of operations in
planning, budgeting and reviewing the performances of various businesses.
We believe EBITDA is a useful and commonly used measure of financial
performance in addition to net profit, operating profit and other
profitability measures under IFRS or US GAAP because it facilitates
operating performance comparisons from period to period and company to
company. By eliminating potential differences in results of operations
between periods or companies caused by factors such as depreciation and
amortization methods, historic cost and age of assets, financing and
capital structures and taxation positions or regimes, we believe EBITDA
can provide a useful additional basis for comparing the current
performance of the underlying operations being evaluated. For these
reasons, we believe EBITDA and similar measures are regularly used by the
investment community as a means of comparison of companies in our
industry. Different companies and analysts may calculate EBITDA
differently, so making comparisons among companies on this basis should be
done very carefully. EBITDA is not a measure of performance under IFRS or
US GAAP and should not be considered in isolation or construed as a
substitute for operating profit or net profit as an indicator of the
company"s operations in accordance with IFRS or US GAAP.
(2) Refer to Supplemental Information for the definition of the
term.
Supplemental information
Regional information
Quarter Quarter
ended ended
Sept 2006 Sept 2005
Metric tons Metric tons
(000"s) (000"s) % change
Sales
Fine Paper - North America 368 428 (14.0)
Europe 626 673 (7.0)
Southern Africa 91 102 (10.8)
Total 1,085 1,203 (9.8)
Forest
Products - Pulp and paper
operations 400 411 (2.7)
Forestry operations 383 532 (28.0)
Total 1,868 2,146 (13.0)
Year Year
ended ended
Sept 2006 Sept 2005
Metric tons Metric tons
(000"s) (000"s) % change
Sales
Fine Paper - North America 1,426 1,433 (0.5)
Europe 2,450 2,427 0.9
Southern Africa 328 317 3.5
Total 4,204 4,177 0.6
Forest
Products - Pulp and paper
operations 1,470 1,565 (6.1)
Forestry operations 1,525 1,737 (12.2)
Total 7,199 7,479 (3.7)
Restated
Reviewed Reviewed
Quarter Quarter
ended ended
Sept 2006 Sept 2005
US$ million US$ million % change
Sales
Fine Paper - North America 373 424 (12.0)
Europe 569 596 (4.5)
Southern Africa 87 99 (12.1)
Total 1,029 1,119 (8.0)
Forest
Products - Pulp and paper
operations 245 239 2.5
Forestry operations 22 30 (26.7)
Total 1,296 1,388 (6.6)
Operating profit (loss)
Fine Paper - North America 7 (48) -
Europe (48) 42 -
Southern Africa 1 (15) -
Total (40) (21) -
Forest Products 85 35 (142.9)
Corporate 6 (2) -
Total * 51 12 (325.0)
Earnings before interest, tax,
depreciation and amortisation
charges
Fine Paper - North America 37 (16) -
Europe 1 94 (98.9)
Southern Africa 5 (12) -
Total 43 66 (34.8)
Forest Products 121 70 72.9
Corporate 6 (1) -
Total * 170 135 25.9
Net operating assets
Fine Paper - North America 1,108 1,199 (7.6)
Europe 1,796 1,735 3.5
Southern Africa 145 160 (9.4)
Total 3,049 3,094 (1.5)
Forest Products 1,188 1,325 (10.3)
Corporate and other 19 55 (65.5)
Total 4,256 4,474 (4.9)
Restated
Reviewed Reviewed
Year Year
ended ended
Sept 2006 Sept 2005
US$ million US$ million % change
Sales
Fine Paper - North America 1,439 1,458 (1.3)
Europe 2,194 2,239 (2.0)
Southern Africa 325 323 0.6
Total 3,958 4,020 (1.5)
Forest
Products - Pulp and paper
operations 896 908 (1.3)
Forestry operations 87 90 (3.3)
Total 4,941 5,018 (1.5)
Operating profit (loss)
Fine Paper - North America (16) (259) -
Europe (27) 84 -
Southern Africa (6) (11) -
Total (49) (186) -
Forest Products 175 83 110.8
Corporate (1) (6) -
Total * 125 (109) -
Earnings before interest, tax,
depreciation and amortisation
charges
Fine Paper - North America 103 (122) -
Europe 162 284 (43.0)
Southern Africa 10 4 150.0
Total 275 166 65.7
Forest Products 316 220 43.6
Corporate - (5) -
Total * 591 381 55.1
Net operating assets
Fine Paper - North America 1,108 1,199 (7.6)
Europe 1,796 1,735 3.5
Southern Africa 145 160 (9.4)
Total 3,049 3,094 (1.5)
Forest Products 1,188 1,325 (10.3)
Corporate and other 19 55 (65.5)
Total 4,256 4,474 (4.9)
* Operating profit and EBITDA for the year ended September 2006 reduced by
US$12 million in respect of restructuring charges, asset impairments and
asset impairment reversals (September 2006 quarter: US$1 million). September
2005 reduced by US$232 million (September 2005 quarter: US$10 million) in
respect of asset impairments and asset impairment reversals.
Note: 2006 fiscal year included 52 weeks (2005 fiscal year: 53 weeks),
September 2006 quarter included 13 weeks (September 2005 quarter: 14 weeks).
Supplemental information
Summary rand convenience translation
Restated
Quarter Quarter
ended ended
Sept Sept %
2006 2005 change
Sales (ZAR million) 9,393 9,062 3.7
Operating profit (loss) (ZAR million) 370 78 374.4
Profit (loss) for the period (ZAR million) 290 (189) -
EBITDA (ZAR million) * 1,232 881 39.8
Operating profit (loss) to sales (%) 3.9 0.9
EBITDA to sales (%)* 13.1 9.7
Operating profit (loss) to average net
assets (%) 5.1 1.2
EPS (SA cents) 130 (85) -
Headline EPS (SA cents) * 14 (33) -
Net debt (ZAR million) *
Net debt to total capitalisation (%) *
Cash generated by operations (ZAR million) 1,145 1,058 8.2
Cash retained from operating activities
(ZAR million) 1,558 1,384 12.6
Net movement in cash and cash equivalents
(ZAR million) 370 1,273 (70.9)
Restated
Year Year
ended ended
Sept Sept %
2006 2005 change
Sales (ZAR million) 32,630 31,321 4.2
Operating profit (loss) (ZAR million) 825 (680) -
Profit (loss) for the period (ZAR million) (26) (1,148) -
EBITDA (ZAR million) * 3,903 2,378 64.1
Operating profit (loss) to sales (%) 2.5 (2.2)
EBITDA to sales (%) * 12.0 7.6
Operating profit (loss) to average net
assets (%) 2.9 (2.4)
EPS (SA cents) (13) (506) -
Headline EPS (SA cents) * (73) 125 -
Net debt (ZAR million) * 16,426 12,782 28.5
Net debt to total capitalisation (%) * 46.4 40.9
Cash generated by operations (ZAR million) 3,064 3,552 (13.7)
Cash retained from operating activities (ZAR
million) 1,506 1,879 (19.9)
Net movement in cash and cash equivalents
(ZAR million) (977) (718) -
* Refer to Supplemental Information for the definition of the
term.
Supplemental information
Exchange rates
Sept June March Dec Sept
2006 2006 2006 2005 2005
Exchange rates:
Period end rate:
US$1 = ZAR 7.7738 7.1700 6.1655 6.3275 6.3656
Average rate for the
Quarter: US$1 = ZAR 7.2475 6.4658 6.1858 6.4795 6.5289
Average rate for the
YTD: US$1 = ZAR 6.6039 6.4031 6.3334 6.4795 6.2418
Period end rate:
EUR1 = US$ 1.2672 1.2789 1.2119 1.1843 1.2030
Average rate for the
Quarter: EUR1 = US$ 1.2744 1.2570 1.1983 1.1915 1.2139
Average rate for the
YTD: EUR1 = US$ 1.2315 1.2191 1.1964 1.1915 1.2659
The financial results of entities with reporting currencies other than the
US Dollar are translated into US Dollars as follows:
- Assets and liabilities at rates of exchange ruling at period end; and
- Income, expenditure and cash flow items at average exchange rates.
This report is available on the Sappi website www.sappi.com
Other interested parties can obtain printed copies of this report from:
South Africa:
Computershare Investor Services 2004 Limited
70 Marshall Street
Johannesburg 2001
PO Box 61051
Marshalltown 2107
Tel +27 (0)11 370 5000
United States
ADR Depository:
The Bank of New York
Investor Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258
Tel +1 610 382 7836
United Kingdom:
Capita Registrars
The Registry
34 Beckenham Road
Beckenham, Kent
BR3 4TU, DX 91750
Beckenham West
Tel +44 (0)208 639 2157
Date: 09/11/2006 08:56:29 AM Produced by the JSE SENS Department
